We were going to leave this for the morning report, but found it compelling enough to publish now for traders who may be planning tomorrow’s trades.  We’ve delved into the 15 minute level in honor of our namesake. 

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There is a very consistent pattern on FOMC days that sees a strong open with gains trailing off into noon, then a dip into the 30 minutes just before the 2:15 pm release, an expected volatile 15 minutes into 2:30 pm tending to be net up, and continued gains into 3:00 pm.  In the last 3 announcements that occured in since the March rally began (including the QE one on Mar 18 09), the strongest gains have been made in the first 15 minutes into 2:30 pm, with gains trailing off into 3:00 pm.  The bullish edge tends to disappear into 3:30 pm (with the last 3 Announcements reversing much of the net gains).  Then, a moderately bullish to neutral close.  In the last 3 Announcements, the 3:45 to 4:00 pm period has been very strong, but on average over the last two years, this period has been a big net loser. 

Bottom line is that FOMC days usually create gains, with the bullish edge conservatively over at 3:00 pm.  Does this alter our thesis that equities need to correct this week and Treasuries need to advance?  No, but it does serve as a counterweight, and what needs to be done needn’t always occur.  On the flip side, if we don’t see this pattern emerge tomorrow, and rather see selling into the noon hour, we would be very weary of longs at that point.

Hope this helps and, as always, feedback is encouraged.  In tomorrow morning’s report, we will look at the post FOMC day to see if there are any tradable edges there.

After the successful 3 Year auction today, the 30 Year (which we follow most closely as a proxy for the long dated Treasuries) sits in a fine position to weather even a tepid 10 Year auction tomorrow; however, with the FOMC Announcement 75 minutes after the 10 Year auction tomorrow, it could easily be overshadowed. 

Another scenario for consideration is that (1) QE is not renewed in the FOMC Announcement tomorrow, which would otherwise be bearish for Treasuries and (2) the 10 Year and 30 Year auctions this week have such strong foreign interest that they avoid a downturn.  With another ~$70-80 B in POMO money set to come into the markets over the next month and another (likely) record breaking set of auctions set for the end of the month, this is risky for Bernanke.  However, nonrenewal of QE and strong auctions this week would send a very confident signal to the Treasury market this week.  Raising the interest rate on excess reserves or hinting at tightening could also help to stem the dangerous advance in equities; however, as we have said before, Bernanke does not want to be seen as putting in the top in equities. 

We don’t envy his position and don’t front run big news.  However, for those with positions on, our continuing thesis is that, one way or another, equities will correct this week and Treasuries will advance (with yields turning down).  For the grand scheme to be a success, we’d like to see the 30 Year close over 119’08.5 resistance this week.  If there is a close under 114’30, the march up in yields will become a threat again.

The POMO auction was strage today, as Zero Hedge reports.  Any bullish trading edge left over from the prior POMO day was expected to disappear by mid-day anyway (and apparently disappeared long before the open today), so we will now guide ourselves by other factors. 

The only leader that did not confirm the equities downturn today was gold, which equity bears will want to see breach support tomorrow.

Overnight, 990.00 support will be the level to watch, with 983.75 to 999.50 unlikely to be breached either way.

10:52 am EDT:

Short term: Our critical point of control at 994.00 did not hold (low of 992.50), so we won’t look for anymore longs unless the 1:00 pm 3 Year auction is a disaster and gives equities bullish momentum.  Until then, we would short in the 998 to 1000 area, which includes Fibonacci, and volume-based VWAP resistance.  However, if this turns into a directional day, we likely won’t see that area and will have missed the move.  For any shorts out there, the next downside target is  983.75, with 983.75 to 987.00 containing several forms of support to slow the market.

Long term: Our ongoing theme is that the Fed needs a temporary stock market correction in order to let yields calm back down.  Whether this is the start of it, or merely position squaring ahead of tomorrow’s FOMC Announcement remains to be seen, but we will likely know one way or another by Thursday.

9:53 am EDT:  We’ve seen a pretty swift price drop on about average volume.  We’re still willing to fade long the 994-996 area, but will not stick around with more than a 1 point stop.  994.00 is the highest value point of control in this upper range and a move below suggests we could test the next one down at 983.75.

The Precise Take – Maintaining strength and looking ahead to Wed’s FOMC Announcement

Yesterday:  We wrote

[W]e would like to see a break of 998.50 early before entering shorts and indeed may fade long this area if buying comes into the ES.  We would also expect longs to come in at the 994.00 to 996.00 area.  If it turns out to be a range day (likely), the downside will be trickier to trade than the upside.  Above, and we don’t get outright bullish until above Globex highs at 1007.75 [corrected from 1007.50].  1010.50 to 1015.25 has very little resistance. 

The ES could not break the overnight high in early trading yesterday and ended up testing Friday’s day-session’s low of 999.50, with a final probe down to test our critical support of 998.50 (low of 998.25).  This area was quickly rejected and breakout shorts were forced to cover into the close.  When a high confluence support area is breached by a point or less and quickly reversed, it is often a clue that the reversal will continue from forced covering as it did yesterday.

Today’s News:  The 3 Year Auction at 1:00 pm will be the one to watch as an indication of long term Treasury interest ahead of the 10 Year (tomorrow) and the 30 Year (Thursday).  As we wrote yesterday,

[A]s we have seen recently, the smaller auctions can go poorly as long as the last longer dated auction of the week goes well.  Therefore, it has more bullish potential for Treasuries (bearish for equities) than vice versa because weakness will be downplayed.  This week is the last holdout for Treasury longs and we expect much volatility into Wednesday and Thursday, though today will likely be quiet.

POMO:  Yesterday and today are days on which the Federal Reserve Bank of New York conducts permanent open market operations (POMO), for which we have developed trading edges with the help of others*.  Yesterday’s price action fit Graph 3 from our Sunday post quite closely after the first hour (see page 2 for the comparison with actual price action).  The tape-painting into the close effect had been diminishing recently with gains concentrated in the preceding afternoon hour, but resurfaced yesterday.  Generally, we were bullish into the afternoon and early trading today, which is what has occurred.  Today’s time profile has a bullish edge into the morning, but turns bearish around mid-day. 

Big Picture:  We don’t have much to add from our Big Picture segment from yesterday’s report regarding the FOMC Announcement and Auctions.  Regarding the leading markets we follow, we wrote:

[The leaders] are not yet pricing in further equity gains this morning.  The EuroYen cross, an important barometer of risk taking is testing its June highs.  A break through resistance would signal expected further gains.  Gold is off its Thursday highs and curiously did not advance on Friday’s gains in equities.  Also, the 30 Year T-Bond is holding support at its July low, but just barely.

Gold and the EuroYen cross finished the day materially lower, with gold bouncing off a 61.8% Fibonacci retracement from its July 29 low, which has held overnight.  Overnight, the EuroYen has lost further ground.  The big winner yesterday, however, was the 30 Year T-Bond future, which formed a bullish engulfing candlestick pattern on the daily chart after testing critical support.  This puts Treasuries in a good position into tomorrow as even a weak 3 Year Auction today will likely not cause the 30 Year to break support.  All in all, the leaders are still not pointing toward new highs in the S&P 500.  Gold will be the likely leader if this pattern reverses, so we’ll watch for a strong move up as an early indication that equities could see another strong run up.

Trading Today:    Putting it all together, we are not expecting a…

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